I agree comeinvest. Do you have any thoughts on what this dislocation would be or could be? I always view stuff like this as there being additional risk that is now relevant that wasn’t previously.SOFR is relevant. All short-term risk-free rates, fed funds, SOFR, implied options financing, implied futures financing (equities and treasuries), repo, should theoretically be equal or very close, were it not for some limits to arbitrage and some regulatory balance sheet constraints of some market participants. An unusually large difference would indicate some sort of market dislocation.
Then the market maker realizes that there are too many sellers, and thus lowers the price (ie, increases the interest rate). Whether the MM has access to SOFR rates isn't relevant; they will buy the box at the lowest price they can get away with. If there are too many sellers, the MM is in the driver's seat and can buy at lower and lower prices.
I used 3-mo as an example. You can look at 2-month, 4-month, whatever you want -- the premium is higher now than it was several months ago.
I didn't mention treasuries in my list, because I'm not sure if they are risk-free any more, as per the large yield spread to SOFR OIS swap rates and per the relatively high credit default swap rates.
Statistics: Posted by LoveTheBogle — Tue Dec 10, 2024 8:04 am — Replies 646 — Views 97874